Self-employed workers often find it intimidating to navigate through the various health insurance options. Without the support of an employer-sponsored plan, it becomes challenging to determine the starting point. The uncertainty of whether insurance is necessary and the criteria to consider when choosing to enroll further compound the situation. To shed light on this matter, this article provides essential information regarding insurance choices, expenditure, and potential tax benefits.
Who is Considered Self-Employed?
Being your own boss, managing your own income, and not having any individuals working under you.
- Freelancers
- Consultants
- Independent contractors
- Entrepreneurs
Do I Need Health Insurance If I’m Self-Employed?
The choice between self-paying or enrolling in health insurance rests with you. You have a better understanding of your situation than anyone else. Nevertheless, it is common knowledge that healthcare expenses can become costly, and requirements can be unpredictable.
A reliable insurance plan can guarantee that you receive necessary medical attention at the right time and at a manageable cost.
Self-Employed Health Insurance Options
Navigating health insurance options may appear challenging for freelancers, entrepreneurs, and contractors, but there is a wide range of off-exchange and on-exchange health insurance plans available to choose from.
Some individuals choose to buy insurance directly from an insurance provider or broker, while others search for a plan on their state or federal marketplace. In Minnesota, the state health insurance marketplace is known as MNsure.
Whether you decide to purchase directly or explore the marketplace, there is a wide range of affordable and all-encompassing plans to choose from.
Paying for Health Insurance When You’re Self-Employed
Having a comprehensive understanding of the factors that affect pricing and the anticipated payments can significantly assist in reducing costs when it comes to paying for coverage.
Self-employed health insurance costs
The cost of health coverage varies depending on various factors, including but not limited to your needs, especially when you are self-employed. Important considerations include your age, location, and different plan options. The geographical aspect is particularly crucial as premium rates tend to differ between states, particularly if your area lacks a highly competitive health insurance market.
Expected health insurance payments, whether for an individual or a family, usually encompass the amount you may be charged.
- What you pay before your plan kicks in (deductible)
- What set fees you pay for specific services (copays)
- The most you’ll have to pay for covered care in a single year (out-of-pocket maximum)
Insurance for Self-Employed: What’s Best?
If you work for yourself and have no employees, you are most likely classified as a sole proprietor or a single-member LLC. However, it can be challenging to understand health insurance options since the IRS does not distinguish between you and your business.
It should be noted that regardless of working full-time for your company, you won’t be classified as an employee. It’s worth remembering that this rule is applicable to both Sole Proprietorships and Single-Member LLCs that haven’t chosen corporate taxation.
Here are a few cost-effective choices for health benefits that offer tax advantages.
- Purchase an individual health plan, either off-exchange or from the ACA exchanges. (Our individual health insurance platform can help you shop).
- Consider an affordable alternative to traditional insurance like a faith-based sharing plan.
- Get on your spouse’s employer-sponsored health plan, if available.
- Purchase a group health insurance plan for yourself (in certain states).
- Hire your spouse as an employee and set up a health reimbursement arrangement. We know, this sounds crazy. But hear us out.
Is there group health insurance for self-employed people?
Insurers are obliged to provide coverage in the small group market for individuals who are defined as “groups of one” by the following states, as reported by the Kaiser Family Foundation.
- Colorado
- Connecticut
- Delaware
- Florida
- Hawaii
- Iowa
- Louisiana
- Maine
- Massachusetts
- Mississippi
- New Hampshire
- New York
- North Carolina
- Rhode Island
- Vermont
- Washington
What Are The Options for Group Health Insurance for The Self-Employed?
Small-group insurance has been the go-to choice for numerous small employers seeking to provide health benefits as it offers a range of options such as managed care (HMO, PPO, and POS), indemnity fee-for-service, and high-deductible health plans.
Small-group plans can be purchased directly from an insurance company, through a broker or private exchange, or by utilizing their state’s SHOP Exchange. It is possible to enroll in this type of plan at any time, rather than solely during open enrollment.
Although these plans have gained popularity and offer tax benefits, as well as being reliable product choices, they come with a high cost and lack customization. Additionally, there are unexpected premium hikes annually and mandatory participation rate regulations.
However, it is important to keep in mind that the option to choose a group plan may only be available to self-employed individuals in specific states.
Health Reimbursement Arrangements
Employers are able to provide an affordable, tax-advantaged option to the traditional insurance by offering a health reimbursement arrangement. This arrangement reimburses employees for their individual insurance premiums and eligible medical expenses using pre-tax funds.
New reimbursement models such as QSEHRA and ICHRA level the tax playing field for employer reimbursements, making them comparable to traditional small group plans, but without the burdensome requirements. Previously, group plans held a significant advantage as they were considered deductible expenses for employers and deducted from employees’ wages on a pre-tax basis.
Prior to discussing the approach, let’s delve into the two primary categories of HRAs.
The QSEHRA, which stands for Qualified Small Employer Health Reimbursement Arrangement, enables small businesses to allocate a predetermined sum of money per month for employees to spend on tax-exempt medical expenses or individual health insurance.
This allows employers to provide benefits in a tax-efficient way, without the complexity of managing a conventional group plan, while giving employees the freedom to select their desired plan. The amount of reimbursement can vary depending on the employee’s age and family size.
The Individual Coverage Health Reimbursement Arrangement (ICHRA) offers identical benefits to the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), but without any restrictions on maximum contribution limits or company size.
Like QSEHRA, ICHRA provides the advantage of adjustable rates based on age and family size, while its standout feature is the ability to scale benefits for different classes of employees. Moreover, ICHRA allows integration with a group plan, setting it apart from other options.
Here’s the HRA Strategy if You’re Self-Employed With No Employees and You’re Married:
- Hire your spouse as a W-2 employee:
- Your spouse’s salary can just be the amount you want to reimburse through the HRA, but it must be a fair wage for what they are doing (i.e., you can’t reimburse $100k through an HRA if your spouse is not actually doing that much work)
- It’s a good idea to have an employment contract and time sheet for record-keeping purposes
- Make your spouse the primary member of your family health plan
- Cover yourself as a dependent on your spouse’s major medical health plan
- Set up a One-Person 105 HRA, ICHRA, or QSEHRA for your spouse:
- Choose the One-Person 105 option if you have significant medical expenses or have other employees that are only excludable under the One-Person 105 rules; the One-Person 105 HRA meets the HRA discrimination requirements because your spouse is the only eligible employee
- Choose QSEHRA if you have health expenses that are less than the QSEHRA reimbursement limit or have other employees that are excludable under the QSEHRA regulations so that your spouse is the only eligible employee for the QSEHRA
- Choose an ICHRA if the reimbursement limits of QSEHRA are too restricting. There are no limits on ICHRA contributions.
- Save all your medical bills and records and have your company reimburse the bills each month from a separate account
In order for this employee insurance strategy to be effective for small businesses, it is necessary to avoid hiring any additional W-2 employees who would qualify for ICHRA, QSEHRA, or a One-Person 105 HRA (please review these regulations carefully).
Additionally, this strategy assumes that neither you nor your spouse have ownership in any other businesses with employees (as the plan may not meet the requirements of Section 105 due to common ownership rules). It is important to maintain thorough record-keeping as well.